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April 7 --International Securities Exchange LLC's patent infringement case against Chicago Board Options Exchange Inc. was dealt another blow in an April 7 ruling by the U.S. Court of Appeals for the Federal Circuit.

The court had previously limited ISE's case to whether it could distinguish an automated part of CBOE's hybrid options trading system. The court now rejected ISE's arguments that it should not have had the burden to show that the hybrid system was actually two independent systems--one automated and one a typical pit trading system.

The only positive news for ISE was a reversal of a finding of invalidity of one claim for indefiniteness. The appeals court built on its prior jurisprudence that the need to show an “algorithm” for a computer-based method claim is very flexible.

Automated Trading System for Options

ISE owns a patent (U.S. Patent No. 6,618,707) on an automated exchange for trading financial instruments. The “automated exchange” described in the patent is distinguished from the traditional floor-based open-outcry system for options trading in which traders stand in a “pit” and loudly communicate bids and offers.

ISE sued CBOE for patent infringement in the U.S. District Court for the Northern District of Illinois.

In May 2012, the Federal Circuit construed “automated exchange” to mean “a system for executing trades of financial instruments that is fully computerized, such that it does not include matching or allocating through the use of open-outcry,” and it “agreed with the district court that the patentee disavowed all manual or partially automated systems of trading.” 677 F.3d 1361, 2012 BL 111334, 102 U.S.P.Q.2d 1683 (Fed. Cir. 2012).

CBOE operates what it calls the Hybrid Trading System, combining elements of open-outcry trading and a fully screen-based trading system called CBOEdirect.

Mandate Rule Not Violated

Judge Jimmie V. Reyna wrote the Federal Circuit's opinion, which rejected ISE's argument that the jury instructions violated the “mandate rule”--that the appeals court's first rulings and the claim construction were the law of the case.

In general, the court recited from the record and dismissed the charge that ISE did not have an opportunity to show that CBOEdirect is an independent exchange, separate from the open-outcry aspects of Hybrid, that could infringe the patent on its own.

The mandate rule was not violated, the court said, because it was unresolved after the first opinion whether CBOEdirect could be considered independently. It was thus not error for the lower court to put the burden on ISE to make that showing.

Algorithm Requirement Loose

The court then turned to the district court's ruling that claim 2 of the '707 patent was invalid for failing to disclose an algorithm for performing the function, after filling public orders for a trade, of “matching” professional orders “on a pro rata basis.”

The algorithm does not have to be a step-by-step recitation, the court said. According to Finisar Corp. v. DirecTV Grp., Inc., 523 F.3d 1323, 1340, 2008 BL 81669, 86 U.S.P.Q.2d 1609 (Fed. Cir. 2008), the court said, the algorithm may be expressed “in any understandable terms including as a mathematical formula, in prose, or as a flow chart, or in any other manner that provides sufficient structure.”

Here, it was adequate that “matching” was construed in the first Federal Circuit opinion, that “pro rata” has a clear meaning and that the specification described exactly how the proportional distribution would take place. Though the discussion of the last of these was merely an explanation and not a step-by-step description, the court said, “a person of ordinary skill in the art would understand the algorithmic structure for performing the claimed function.”

Finally, the first opinion had distinguished “matching” and “allocating” as separate functions, but the specification showed an “overlap”--and possible equivalence--between pro rata matching and pro rata allocation. The court said that the disclosure of the latter does not detract from the disclosure of the former, nor does their similarity “mean that the overall processes are no longer 'distinct.' ”

The court thus reversed the finding of invalidity of claim 2 for indefiniteness.

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